DraftKings Poised for 2023 Beats, But Caution Warranted

Posted on: January 23, 2023, 08:47h. 

Last updated on: January 23, 2023, 10:26h.

DraftKings (NASDAQ:DKNG) stock is tracking other gaming equities in the early stages of 2023. But  some on the sell side, while acknowledging a catalyst-rich story, are neutral on the online sportsbook operator.

DraftKings stock
DraftKings CEO Jason Robins at an industry conference. Stifel says the stock has catalysts in 2023. (Image: Bloomberg)

In a note to clients late Monday, Stifel analyst Jeffrey Stantial initiated coverage of DraftKings with a “hold” rating and a $15 price target, implying only modest upside from today’s close at $14.56. He notes that while the gaming company has the potential to beat and raise its previously issued 2023 guidance, profitability remains a few quarters out.

However, profitability remains several quarters away, and we see risk of market share compression as DraftKings rationalizes customer acquisition spend and as several well-capitalized competitors make their US debut,” wrote Stantial.

The analyst doesn’t cite rivals by name, but Fanatics is lurking, recently entering the US sports betting arena and stoking speculation of promotional spending war in the process.

For DraftKings Stocks, Profitability Is of the Essence

With Fanatics likely profitable for the bulk of, if not all of  2022, and other rivals getting close to that benchmark, DraftKings needs to show analysts and investors it can halt its money-losing and generate positive earnings before interest, taxes, depreciation and amortization (EBITDA).

The prevailing wisdom on Wall Street is that the operator will be able to do that in the fourth quarter of this year. But some analysts believe its profitability could arrive as soon as the April quarter. Aside from that obvious issue, Stantial sees catalysts for DraftKings stock.

“We see several positives for the shares, including: (1) a likely leading long-term market share position given scale, technology, first mover advantage, and cross-sell opportunities, (2) material growth tailwinds for the broader US online gambling market, (3) muted expectations entering 2023, and (4) reflexive benefits from DraftKings’ ‘win at all costs’ mentality,” noted the analyst.

DraftKings is higher by 27.83%. But that rally could be threatened by a larger-than-expected interest rate increase by the Federal Reserve and/or a recession that pinches consumer discretionary spending.

Headwinds, Tailwinds for DraftKings Stock

Stantial points out the possibility exists for multiple headwinds or tailwinds for DraftKings shares this year.

“Upside risks include: (1) faster than expected profitability, (2) new state expansion, (3) further supply exits, and (4) federal excise tax repeal. Downside risks include: (1) rising interest rates, (2) difficulty reaching profitability or margin targets, (3) new competitive supply, and (4) regulatory changes,” according to the Stifel analyst.

On the US regulatory front, industry consensus holds that only North Carolina and Vermont are likely to approve mobile sports wagering this year, leaving Texas as the only possible large-scale surprise for sportsbook operators. But that’s a stretch. On the upside, Stantial says DraftKings trades at the low end of the historical valuation range for top-tier European sportsbook operators.